Super funds have managed to push through a challenging quarter for markets, posting gains in September and recovering from August’s falls. Despite the recent volatility and geopolitical risks that have shaken global markets in recent months, Australia’s super funds have proved up to the task of navigating the current uncertainty.
The median balanced option returned 1.2% in September, according to leading superannuation research house SuperRatings. The median growth option fared slightly better, returning 1.5% in September, while the capital stable option returned 0.4%.
It has been a successful year for super funds, which has seen the median balanced option return hit 11.5% over the calendar year to date. Over the past five years, the median balanced option has returned 7.8% p.a., compared to 8.6% p.a. from growth and 4.9% p.a. from capital stable.
Accumulation returns (% p.a. to end of September 2019)
|1 mth||1 yr||3 yrs||5 yrs||7 yrs||10 yrs|
|SR50 Growth (77-90) Index||1.4%||7.0%||9.1%||9.5%||10.3%||8.3%|
|SR50 Balanced (60-76) Index||1.2%||6.9%||8.5%||7.8%||9.1%||7.7%|
|SR50 Capital Stable (20-40) Index||0.4%||5.8%||4.9%||4.9%||5.4%||5.6%|
Pension returns also saw promising growth in September, with the balanced option returning 1.2% over the month, compared to 1.5% from the median growth option and 0.5% from the median capital stable option.
Pension returns (% p.a. to end of September 2019)
|1 mth||1 yr||3 yrs||5 yrs||7 yrs||10 yrs|
|SRP50 Growth (77-90) Index||1.5%||7.9%||10.6%||9.7%||11.5%||9.3%|
|SRP50 Balanced (60-76) Index||1.2%||7.8%||9.3%||8.5%||10.0%||8.6%|
|SRP50 Capital Stable (20-40) Index||0.5%||6.7%||5.6%||5.5%||6.1%||6.3%|
However, while pension returns have held up well, the low rate environment is making it challenging for super funds to deliver income to those in the retirement phase. The RBA’s interest rate cut last week brings the cash rate to a new record low of 0.75% and has pulled longer-term rates down with it. Falling rates have resulted in capital gains in bond markets since the start of 2019, but the downside is the challenge the low rate environment presents to retirees in need of income.
“With interest rates so low, the hunt for yield is intensifying and is likely to become more of a challenge for super funds going forward,” said SuperRatings Executive Director Kirby Rappell.
“Pension returns are holding up well, but the split between capital gains and income is critical for retirees, because they rely on income streams to fund activities in retirement. Over the past few years we’ve seen super funds steadily reduce their allocation to bonds in favour of other income-generating assets like alternatives and property in order to generate their required yield. We expect this theme to continue to play out as rates remain low and possibly move lower over the next year or two.”
The income challenge
The key theme throughout 2019 has been the steady fall in yields as uncertainty surrounding the economic outlook has seen investors move into bonds and other safe assets. In Australia, the yield on 10-year government bonds ended September at 1.0%, down from 2.3% at the start of 2019. As the chart below shows, yields have been on the decline since the Global Financial Crisis, with the 10-year yield falling from a high of 6.5% just prior to the market meltdown. Meanwhile, the cash rate is now 225 basis points below the “emergency lows” of 2009.
Falling yields have supported capital growth but at the expense of income
Source: Bloomberg, SuperRatings
Over the past 15 years to September 2019, an estimated growth rate of 6.9% was observed for the SR50 (60-76%) Balanced Index, which is well ahead of the return objective of inflation plus 3.0%. Over this period, a starting balance of $100,000 in the median balanced option would have accumulated to over $271,000, which exceeds the return objective by around $43,000.
Growth in $100,000 invested over 15 years to 30 September 2019
“Long-term super returns are healthy, even when you include the GFC period,” said Mr Rappell. “However, there’s no doubt that super funds are finding it harder to identify opportunities in the current environment. With valuations stretched, funds are paying more for growth, while lower interest rates mean they need to look beyond traditional assets to generate income.”